The Motley Fool: Spiders and zeroes

Updated 9:33 pm, Tuesday, July 15, 2014

A: "Spiders" is a nickname for Standard & Poor's Depositary Receipts based on the S&P 500 index, and they're also known as SPDRs.

Investors who own Spiders own bits of all the companies in the index, such as Intel, Hasbro, CVS Caremark, Estee Lauder, Gap, Kellogg, MetLife, Pfizer, Nike, Staples, UnitedHealth and Tractor Supply. Unlike index funds, which work much like traditional mutual funds, Spiders are "exchange-traded funds" (ETFs), structured like shares of stock, with the ticker symbol "SPY."

While mutual funds sometimes require minimum investments of thousands of dollars, you can buy and sell as little as one Spider share (recent price: near $200) at a time. Learn more at fool.com/etf/etf.htm and morningstar.com/Cover/ETFs.aspx. We recommend Spiders and low-cost, broad-market index funds for most, if not all, investors. They're a simple way to own much of the U.S. stock market.

Q: What's a zero-coupon bond? - S.B., Hickory, N.C.

A: They're a twist on regular bonds. Bonds are essentially loans, where you typically lend money to companies or governments.

With a traditional $10,000 bond that has a 5 percent interest rate, you lend $10,000 to the borrower (buying the bond) and receive interest payments of 5 percent per year. (In the past, people had to send in coupons in order to receive these payments.) When the bond matures, you get the principal, your $10,000, back.

With a zero-coupon bond, you collect no interest payments, but the amount you lend is less than the amount you'll receive at maturity. Thus, a zero-coupon bond might pay you the equivalent of 5 percent per year by having you lend $6,139 today in order to receive $10,000 in 10 years.

Fool's School

Withdrawal pains

A critical aspect of retirement planning is deciding how much of your savings you can afford to spend each year so that it lasts.

Many advisers suggest the 4-percent rule, where you multiply the savings you have when you enter retirement by 0.04, or 4 percent. The result is what you take from your savings for the year. Each subsequent year, you adjust that same sum for inflation -- regardless of the change in your portfolio's value -- and withdraw the new amount. Historically, the rule allowed investors to tap their portfolios over 30-year spans without running out of money.

The rule has fallen out of favor with many advisers, though. ??For one thing, the rule doesn't provide a lot of income, even if you've saved a fairly large amount. More important, though, the strategy is highly dependent on where the stock market happens to be on the day you retire. If the market plunges before you retire and shrinks your nest egg, your withdrawals will be small. ??Thus, more flexible alternatives have been developed.

In one plan, you assess whether the overall market's price-to-earnings (P/E) ratio is high or low, historically speaking, before commencing withdrawals. The more expensive the market, the less you can safely take out -- but when the market's P/E is low, you can sometimes take as much as 5 or 5.5 percent annually with a high degree of confidence.

Another method involves adjusting your withdrawals. During good markets, withdrawals can rise, but during downturns, or if your portfolio doesn't grow, you give up your inflation adjustment, or even perhaps take a pay cut. ??Other factors can also play a part in your withdrawal rate, such as how long you expect to live, what other income streams you have, inflation rates, taxes, your portfolio's allocation between stocks and bonds, and so on. Don't be afraid to seek professional advice.

Learn more at fool.com/retirement and via a free trial of our "Rule Your Retirement" newsletter (details at ruleyourretirement.com).

My Dumbest Investment

A long slump

My dumbest investment was Rite Aid, which I bought when it was trading around $14 per share. My son is 16, and it hasn't seen $14 for almost all of his life. I can't even find the shares now to sell them, but the U.S. mail reminds me every year that I'm still holding them. It's now a reminder that your pharmacist is not likely to be the best stock adviser. - J.J., online

The Fool responds: Rite Aid did spend many years falling and falling -- even below $1 per share. But it has been turning itself around rather impressively recently, with shares more than doubling in each of the past two years and trading above $7 per share in late June.

Investors need to keep up with the progress of the companies in which they invest, and to be ready to sell if their health or growth prospects deteriorate. To sell missing shares, call Rite Aid's investor relations department to ask which transfer agent it uses. Then call that company to request duplicate certificates. It can be a costly hassle, though.

Foolish Trivia

Name that company

Few people know my name, but most have heard of my three big brands - KFC, Pizza Hut and Taco Bell. They were launched, respectively, in 1952, 1958 and 1962. PepsiCo gradually bought them and then spun them all off together in 1997 as Tricon Global Restaurants. Today I sport more than 40,000 eateries in more than 125 countries and territories, and I employ some 1.5 million people globally. I rake in more than $13 billion annually, with about 70 percent of that generated abroad. In 2012, I opened about five new restaurants per day outside the U.S. Who am I? Last week's answer: Pier 1 Imports.

The Take

Fill your shopping cart with Kroger

Supermarkets, with their thin profit margins, have long been a tough business. Despite that, Kroger has been prospering, averaging 12 percent annual gains for its stock over the past 20 years.

The company has been containing costs and boosting profits, growing faster than even Whole Foods Market. Indeed, it's putting pressure on Whole Foods' heftier profit margins as it moves aggressively into organic offerings with lower prices. It's building its digital presence, too, in part by buying digital coupon marketer YOU Technology. It also recently acquired the well-regarded Harris Teeter chain. Other efforts to drive growth include a big expansion of its gas station network to encourage repeat visits from shoppers, and the development of online retail and delivery options.

Kroger's last quarter featured revenue rising 10 percent year-over-year. Earnings came in below expectations, but were still up 6.5 percent. Kroger's performance is especially impressive given recent food-price inflation. Kroger has become an efficiency machine, generating more of its earnings from higher-margin, private-label items.

Kroger's price-to-earnings ratio of 17 is well below its five-year average, suggesting it's attractively priced. It recently yielded 1.3 percent and it has upped that payout by an annual average of 13 percent over the past five years. (The Motley Fool owns shares of and has recommended Whole Foods Market.)